Expatriates & US Exit Tax
US Expatriates & IRS Exit Tax: A common misconception is that the IRS subjects all expatriates to U.S. exit tax when they renounce or relinquish their U.S. person status, but that is not true. In fact, when most individuals expatriate from the United States, they will not have to face an Exit Tax.
Generally, only Long-Term Residents and U.S. Citizens (aka Covered Expatriates) are even possibly subject to an exit tax.
For an expatriate to be subject to an exit Tax, they have to be a covered expatriate.
Which Expatriates are Subject to U.S. Tax?
Let’s go through the basics:
What is an Expatriate?
An expatriate is simply a person who resides outside of their country of citizenship.
For example, Michael is a U.S Citizen who resides full-time in Spain. Michael may or may not have a “formalized” status in Spain, but he is a citizen of the U.S. Therefore, Michael is considered an expatriate, since he is a U.S. Citizen who resides outside of the U.S.
When a person tax the formal step of relinquishing, renouncing, or abandoning their US status, they are considered to have formally expatriated. As a result, they may become subject to an expatriation tax at exit.
As provided by the IRS:
“The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to U.S. citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their U.S. resident status for federal tax purposes. Different rules apply according to the date upon which you expatriated.”
Who May be Subject to an Expatriation Tax?
For an Expatriate to be subject to an exit tax, they have to first fall into one of two categories:
- U.S. Citizen
- Long-Term Resident (LTR)
Is the U.S. Citizen or LTR “Covered”?
A U.S. Citizen or Legal Permanent Resident is considered a covered expatriate if they meet one of the three tests, and no exceptions apply.
Exit Tax Planning
Covered Expatriates should engage exit tax planning prior to expatriation. Some expatriates may be able to effective plan to reduce or eliminate any exit tax.
Interested in Expatriation from the U.S.?
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